Identifying Fiscal Policy Transmission in Stochastic Debt Forecasts
AbstractA stochastic debt forecasting framework is presented where projected debt distributions reflect both the joint realization of the fiscal policy reaction to contemporaneous stochastic macroeconomic projections, and also the second-round effects of fiscal policy on macroeconomic projections. The forecasting framework thus reflects the impact of the primary balance on the forecast of macro aggregates. Previously-developed forecasting algorithms that do not incorporate these second-round effects are shown to have systematic forecast errors. Evidence suggests that the second-round effects have statistically and economically significant impacts on the direction and dispersion of the debt-to-GDP forecasts. For example, a positive structural primary balance shock lowers the domestic real interest rate, in turn raising GDP and lowering the median debt-to-GDP projection by an additional 10 percent of GDP in the medium term relative to prior forecasting algorithms. In addition, the framework employs a new long-term (five decade) data base and accounts for parameter uncertainty, and for potentially non-normally distributed shocks.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 11/107.
Date of creation: 01 May 2011
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-14 (All new papers)
- NEP-CBA-2011-05-14 (Central Banking)
- NEP-FOR-2011-05-14 (Forecasting)
- NEP-MAC-2011-05-14 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Luiz de Mello & Diego Moccero, 2006. "Brazil's Fiscal Stance during 1995-2005: The Effect of Indebtedness on Fiscal Policy Over the Business Cycle," OECD Economics Department Working Papers 485, OECD Publishing.
- Fuad Hasanov & Reda Cherif, 2012. "Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks," IMF Working Papers 12/230, International Monetary Fund.
- Gustavo Adler & Sebastian Sosa, 2013. "External Conditions and Debt Sustainability in Latin America," IMF Working Papers 13/27, International Monetary Fund.
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